VOX Vanguard Communication Services ETF

Telecom ETFs have, as of late, turned out to be huge winners this year amidst the ongoing broad market turmoil. In fact, the U.S. telecommunication sector is one of the top 10 performers in the S&P 500 index, according to the Wall Street Journal (read: Five Best Performing ETFs (So Far) in 2012).

Thanks goes largely to the service providers, who are consistently delivering robust growth despite the sluggish economy, stiff competition and stringent regulations. Furthermore, these relatively stable companies seem to hold up better than their more discretionary counterparts, an issue that has been especially important during shaky market trading.

Furthermore, from an earnings front, a number of bellwethers have either beat or meet estimates in the last two quarters leading to solid levels of appreciation in share prices. This trend can easily be seen in the case of some of the top U.S. telecom carriers - Verizon Communications (VZ), AT&T Inc. (T) and Sprint Nextel Corp. (S) - that largely drive the overall telecom market. Most of the companies in the space carry decent Zacks Ranks, suggesting that these have a solid outlook for future growth and income as well (read: U.S. Telecom ETFs: Opportunities and Threats).

Investors are now seeing telecom ETFs as a safe haven in the current market turbulence, displacing other traditional safe bets such as bonds and gold. Further, attractive dividend yields in the current low yield environment are drawing investors’ interest in the telecom sector, especially when they are outperforming broad markets.

In fact, out of the nine telecom ETFs, two U.S. telecom ETFs - iShares Dow Jones US Telecom ETF (IYZ) and Vanguard Telecom ETF (VOX) - have been outperforming their broad market counterparts such as SPDR S&P 500 (SPY) by at least 450 and 100 bps in the year-to-date period, respectively.

For momentum focused investors, either of these two options could be interesting picks at this time in the telecom market. Not only have both been outperforming the S&P 500 by a decent margin, but both are currently yielding more than the key benchmark as well.

Due to this, either of these two choices, which we have highlighted in greater detail below, could be worth a closer look by telecom-focused ETF investors at this time:

iShares Dow Jones US Telecom ETF (IYZ)

This is the largest and most popular ETF in the telecom space. It has delivered outstanding returns of nearly 19% to investors so far in the year and has a good dividend yield of 2.23% annually.

With AUM of $618.3 million, the fund seeks to provide returns of the U.S. wired and wireless telecommunication stocks and tracks the Dow Jones U.S. Select Telecommunications Index, a subset of Dow jones Wilshire 2500 index.

Launched in May 2000, the fund holds 28 securities in the basket. It is not widely spread across individual securities, as it puts a larger focus (around 72%) on the top 10 holdings. AT&T, Verizon and CenturyLink hold the top three positions in the basket and combined make up for 37% share.

This suggests that company-specific risk is high in the case of IYZ and the top 10 holdings dominate the returns of the fund (read: Build a Complete Portfolio with These Three ETFs).

The product is heavily weighted towards fixed-line telecom service providers with two-thirds of the share in the basket while mobile service providers take the remaining share. The fund has a slight tilt towards large cap securities, which tend to be more stable and less volatile than the mid and small counterparts, and target value stocks (read: Try Value Investing With These Large Cap ETFs).

The product is quite expensive with an expense ratio of 0.47% and the tracking error is also relatively higher than the other funds in the space. It trades in good volume of more than 400,000 shares per day on average, suggesting a relatively narrow bid/ask spread. However, total expenses are much less than the total returns, making the fund an attractive play at present. 

Vanguard Telecom ETF (VOX)

This fund has returned more than 16% year-to-date and produced attractive dividend yield of 2.76% per annum (read: Three Excellent Dividend ETFs for Safety and Income). It seeks to replicate the price and performance of the MSCI US Investable Market Telecommunication Services 25/50 Index.

With holdings of 35 stocks in the basket, the product includes securities that provide telephone, data-transmission, cellular or wireless communication services. Like its iShares counterpart, VOX allocates the majority of its assets (nearly 71%) to the top 10 firms.

AT&T, Verizon and Sprint occupy the top spots in the basket and make up for a combined 50% share. From a sector perspective, integrated telecom services take the top position followed by wireless telecom services and alternative carriers. Large cap firms account for 58% of the assets while mid and small caps take the remaining portion of the basket.

The Vanguard product was launched in September 2004 and has managed total assets of $531.1 million. This is the low cost choice in the telecom space, charging only 19 bps in fees per year from investors.

VOX also has a relatively narrow bid/ask spread compared to the other funds thanks to good trading volumes of about 60,000 shares per day. Hence, high returns and low cost make VOX an intriguing option to play the telecom markets, especially if they can keep up their outperformance heading into the fourth quarter (read: Four Vanguard ETFs for Long-Term Investors).

The following table describes and compares the returns and yields of the two telecom ETFs with SPY:

 

ETF	AUM  (as of 09/07/12)	No. of Securities	% of Assets in Top 10 Holdings	YTD Return (as of 09/07/12)	Dividend Yield	Expense Ratio
IYZ	618.3 M	28	72.05%	18.97%	2.23%	0.47%
VOX	531.1 M	35	71.20%	16.58%	2.76%	0.19%
SPY	$104.3 B	500	21.06%	15.60%	1.45%	0.09%

 
ISHARS-DJ TELE (IYZ): ETF Research Reports
 
SPRINT NEXTEL (S): Free Stock Analysis Report
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
AT&T INC (T): Free Stock Analysis Report
 
VIPERS-TELE SVC (VOX): ETF Research Reports
 
VERIZON COMM (VZ): Free Stock Analysis Report
 
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